Chapter 8 & 9 - Price and GDP Flashcards
(27 cards)
What happens to Aggregate Expenditure (AE) when the price level rises?
AE shifts downward because real wealth decreases, reducing desired spending.
What does the AE curve intersecting the 45º line represent?
Macroeconomic equilibrium (Y = C + I + G + (X - M))
Why do rising price levels reduce exports?
Canadian goods become more expensive internationally, lowering demand
What does the Aggregate Demand (AD) curve show?
The negative relationship between price level and real GDP
What causes movements along the AD curve?
Changes in the price level
What causes shifts in the AD curve?
Changes in autonomous expenditure, like consumer/business confidence
What is the simple multiplier?
Measures how a change in AE shifts the AD curve horizontally
What is the formula for the simple multiplier?
1/(1-MPC)
When would you use the following multipliers: deposit, simple, and tax
Deposit Multiplier → Use in banking/money supply questions, to calculate how much total deposits increase from a new cash deposit in a fractional-reserve banking system. Formula: 1 / reserve ratio (v) or 1 / (cash-deposit ratio + reserve ratio) if there’s a cash drain.
Simple Multiplier → Use in fiscal policy or aggregate expenditure questions when analyzing how a change in autonomous spending (like investment or gov spending) affects GDP.
Formula: 1 / (1 - MPC)
Tax Multiplier → Use when there’s a change in taxes affecting consumption and thus real GDP. It’s smaller than the simple multiplier because some of the change is saved.
Formula: -MPC / (1 - MPC)
What is assumed constant in the SRAS curve?
Technology and factor prices.
What shape does the SRAS take at low output levels?
Horizontal — called the Keynesian range.
What happens when output increases beyond normal capacity?
Unit costs rise → SRAS curve slopes upward
What shifts the SRAS curve up/left?
Rising production costs or negative tech/productivity shocks.
What shifts the SRAS curve down/right?
Improved productivity or efficiency (lowers costs).
How is long-run equilibrium achieved in the economy?
When AD, SRAS, and LRAS all intersect — no output gap.
What is potential output (Y*)?
The level of output when all resources are fully employed (natural level of employment, where LRAS can be found)
What is an inflationary gap?
Y > Y*, meaning excess demand and rising wages.
What is a recessionary gap?
Y < Y*, meaning unused capacity and unemployment.
What causes slow recovery from a recessionary gap?
Downward wage stickiness — wages don’t fall easily.
What does the Phillips Curve show?
Inverse relationship between unemployment and wage inflation where inflation rate % is on the vertical axis and unemployment rate % is on the horizontal axis
How does the Phillips Curve differ from the AS curve?
Phillips has inflation rates on the vertical axis, not price level
How can gov’t close a recessionary gap?
Expansionary fiscal policy (↓ taxes, ↑ gov spending/transfers)
How can gov’t close an inflationary gap?
Contractionary fiscal policy (↑ taxes, ↓ gov spending/transfers).
What is the “Paradox of Thrift”?
If everyone saves more, total spending drops → economy weakens
